short euro on the rally. >> buy some of that euro sunday night. that's the way to play it. >> we will see you back here ne next week. i'm jim cramer. welcome to my world. >> you need to get in the game. >> firms are going to go out of business, and he's nuts. they're nuts. they know nothing. >> i always like to say there's a bull market somewhere. >> "mad money," you can't afford to miss it. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i'm just trying to make you some money. my job is to entertain, coach. call me at 1-800-743-cnbc. investing ain't easy. but it can be a lot easier and much less daunting than you probably think with a little instruction. the whole business of managing your money is made more confusing and difficult because of all the arcane terminology.
i call it wall street gibberish. if you're not clued it it can sound like the pros are speaking a different language. you've got to remember there is an industry of people that want you to think investing is too hard, head scratching, and that ordinary people like you and me can't do it and the safest thing to do is give your money to a a pro. maybe that is better for some of you with the time constraints but if you can put in one hour per week per stock i know you can beat the professionals. the fact of the matter is many of the pros are after your fees. more interested in taking your money than making you money. that often means keeping you ignorant about the market so you will stay in your stock chains. i like to compare them to the wizard of oz. they don't want you peaking at the man behind the curtain. they don't want you to
understand. if you did then you might very well take control of your own finances. pick your own stocks, and not pay someone else potentially sbosh tant fees to do things you are perfectly capable of doing yourself. that's where i come in. tonight i'm pulling back the curtain and explaining everything. while wall street gibberish sounds complex it's not rocket science, not brain surgery. you don't need to go to business school or work in an investment bank to understand it. you can comprehend all the mystical sounding vocabulary we throw around as long as you have a translator, a coach like me who can explain what the words mean. think of me as a defector who used to play for the other team managing rich people's money in my old hedge fund, but who's now playing for you, teaching you to navigate your way through the mine field of the stock market every weeknight on "mad money." forget "the da vinci code," the
enigma. to be a great investor, you have to break the wall street code. i'm here to help you crack it. that's why tonight i'm giving you my wall street gibberish to plain english dictionary. consider this a glossary of the most important terms you absolutely must understand if you're going to actively manage your own portfolio. words and concepts that many people in the financial industry don't want you to get your heads around. since then you might actually feel empowered enough to pull your money out of their mutual funds and stop handing over fees and commissions. even if you're a pro you may not know enough. want to take advantage of my 30-plus years investing experience and give yourself an edge. let's start with a couple extremely important ideas that go hand in hand. these are the things that baffled me. i had them first explained after listening for ten years to wall street week.
cyclical and secular. you hear them all the time, all day. yet no one but me ever bothers to explain what they mean. even though they are crucial when it comes to picking the right stocks. cyclical has nothing to do with the spin cycle of the washing machine or wagner's ring cycle. some good classical music there. secular isn't about church and state or public versus parochial schools. a company is cyclical if it needs a strong economy to have earnings grow. it's cyclical because it depends on the business cycle. who's cyclical? u.s. steel needs the economy. newcor. caterpillar, ingersol-rand. vail, dupont, ppg. that's the old pittsburgh plate glass. the companies are all hostages to the economy. when it heats up, oh, man. i've got to tell you there's no
stopping them. do you know what they do? they earn a ton of money. we're willing to pay more for earnings. when it slows down [ sell, sell, sell ] when we shift into recession mode, they earn less money. investors pay less for the shares. a secular growth company is one where the earnings keep coming regardless of the economy's overall health. anything you can eat, drink, smoke, use for medication, brush your teeth with. you have consumer staples like colgate and procter, foods, drug stocks like pfizer or merck. these are classic recession resistant stocks you want when the economy slows down. you don't stop eating food or brushing your teeth because of a recession. but then again we know these stocks don't outperform the others when the economy is in full speed motion. why is the secular versus
cyclical distinction important? why is it the first piece of wall street jargon i'm translating tonight? it helps you know how much the companies earn. it matters to the money managers who have so much money to throw around they are buying and selling drives stocks up and down. that's the single biggest determinant of where prices go in the short term. the hedge fund play book is about when to buy and when to sell cyclical stocks and when to buy or sell secular growth stocks based on how economies in this country and around the world are doing. this is what drives their decision-making process. remember, about 50% of any individual stock comes from its sector, its performance. 50%. it's a fancy word for a segment of the economy a stock falls into like tech, energy, machinery, health care, finance. when it comes to sectors much of the moves are based on whether they are in the cyclical or
secular camp. you don't want cyclicals when the economy is breaking. those stocks will get crushed. they always do. there is nothing you can do about it. it's etched in stone. by the same token when business heats up and cyclicals are doing well, nobody wants to own the recession-proof stocks. the smoke stocks, soap stocks. you will not make money. you could lose it though you think they are a consistent grower. this can help you understand another opaque piece of technology. what's known as a rotation. that's when money flows out of one of the cyclical groups into a secular growth. that's what happens. we call them rotations. it has nothing to do with volleyball. this is antithetical to what you have been told about the right way to invest. if you're going to pick your stocks, something which the conventional wisdom regards as the height of idiocy and lunacy you should find high quality companies and stick with them
through thick and thin. that's the conventional wisdom. eventually if you hold out long enough maybe you will make money. this is the brain dead philosophy of buy and hold that i spend so much time trying to debunk. a strategy that has not worked for ten or 20 years. they never think it goes out of sale. it's a zombie ideology that refuses to buy though it's been discredited by the actual performance of the market. as i explain in "getting back to even" in the first three chapters to get you to deal with the volatile, tough market we are in. once you recognize how powerful the secular versus cyclical distinction is you can see why buy and hold is silly. if you're going to own stock through thick and thin no matter what be prepared to lose money in cyclicals when they are out of favor. most people can't do it b. ready to tread water or decline in seculars while the cyclicals are roaring. why take the pain when you can avoid it? most people can't take the pain.
they sell at the bottom. it doesn't mean you should only own the group in style. no. not at all. remember the need for diversification. another important piece of investing vocabulary which means making sure you don't have your eggs in one basket. to me you are diversified when # 20% of your portfolio is in one sector. that way you don't get annihilated if a secular rotation takes down your cyclical stocks because you have growth names that will hold up better or make you money at the same time. here's the bottom line. yes, investing isn't easy. it doesn't have to be mystifying. you just need to learn the language. know the difference between cyclical and secular. recognize the sector rotation when you see one and always stay diversified. jason in new york. jason. >> caller: hi, jim. how you doing? this is me, jason, from harlem. >> good to have you on the show. >> caller: i have a question. when investing in international stocks or etfs do you evaluate
them like you would u.s. companies? >> yes. provided -- and this is a great question, jason. provided they sell at what's known as -- provided they have adrs. you need american depository receipts. why? i have to compare their sec filings with ours. if they don't have the filings i don't think about them. jason, they're too hard, too opaque. if they have adrs, i make the compares and we'll be fine. steve in california. steve. >> caller: hey, jim. boo-yah, california, in los angeles to you. >> oh, man. my old hometown. how can i help? >> caller: first, thanks for getting me back in the game. i have been on the sidelines for years. i'm reading your new book. i'm back in. thank you. >> that's what i want. you've got to get the dividends going. you can beat the stocks that don't have the dividends and you
can beat cash. how can i help? >> caller: that's what i looking at. stocks that have good yield for my i.r.a. >> smart. >> caller: i have been reading the chapter on dividends. i want to figure out the difference between an accidental high yield achiever or something that's too good to be true. i have been doing the homework. i have a couple of stocks that look like they should be bought. i'm nervous. >> you've got to go to cash flow. you can't measure a stock based on earnings or you would have sold att a decade ago. you would have sold master limited partnerships i like. you need to look at cash flow not earnings. the earnings aren't telling the truth. go through the chapter on getting back to even on cash flow. you will understand it. it will take me a half hour. that's a very hard chapter. that's what you use. bill in new york. bill. >> caller: boo-yah, jim. >> boo-yah, bill. >> caller: some time ago you mentioned that the market was going up and that foreign money
was coming into the market. how do you know where the money is coming from -- be it europe, asia or the sidelines? how do you measure it and its significance. >> federal reserve releases figures about whether money is coming from foreigners or not. that's how you measure it. when the currency gets strong you tend to see money from oversees. the foreigners want a stock to go up and they want the currency to go up. when the dollar goes up and the stock market stabilizes that brings in new money but the market has to stabilize or the money doesn't come in. they're not going to bet on currency if the stocks are going down. mastering the language of the market is key to mastering your domain. don't let wall street gibberish get the best of you. always stay diversified. stay with cramer, too. >> announcer: don't miss a second of "mad money." follow @jimcramer on twitter. have a question?
tweet cramer, #madtweets. send jim an e-mail to email@example.com or give us a call at 1-800-743-cnbc. miss something? head to madmoney.cnbc.com. my volt is the best vehicle i've ever driven. i bought the car because of its efficiency. i bought the car because i could eliminate gas from my budget. i don't spend money on gasoline. it's been 4,000 miles since my last trip to the gas station. it's pretty great. i get a bunch of kids waving at me... giving me the thumbs up. it's always a gratifying experience. it makes me feel good about my car. i absolutely love my chevy volt. ♪
i absolutely love my chevy volt. forty-five states have joined together... ...to ensure consistent academic standards across america. these internationally recognized benchmarks... ...are unlocking a better way to prepare our children for college and their careers. because when our kids do better... ...america does better. let's reach higher. let's invest in our teachers and inspire our students. let's solve this. zagat just gave hertz its top rating in 15 categories, including best overall car rental. so elevate your next car rental experience with the best. it's just another way you'll be traveling at the speed of hertz. in your fight against bugs. ortho home defense max. with a new continuous spray wand. and a fast acting formula. so you can kill bugs inside, and keep bugs out. guaranteed. ortho home defense max.
tonight tonight i'm helping you translate the cryptic and occasionally unfathomable terminology that makes owning stocks so darn difficult. i'm giving you the phrase book to navigate through the world of investing. hey, you know what? i call it the cramerican dictionary. consider it the encyclopedia cramerica for tearing back the cloak of mystery that makes managing your money seem impossible [ house of pain ] when it's really [ the house of pleasure ] >> you don't have to be stephen hawking or albert einstein to understand this stuff although with the pros when they talk about stocks even einstein would
have a tough time figuring out what they are saying. i explained the difference between cyclical business that is need a healthy economy to grow earnings versus secular growth companies. there we are thinking toothpaste and corn flakes that expand about the same pace regardless of whether we are in an upturn or a downturn in the business cycle. i told you to sell the cyclicals when the economy starts slowing down and do the reverse as it picks up steam. why do i tell you this? it's the play book the hedge funds use. even though the hedge funds behave like hurt animals who buy and sell the same stocks at the same time their play book, we're stuck with it. it works because they have the big money. we have to learn it. i can teach it. the reason has to do with another piece of wall a street gibberish lexicon you must know if you're going to pick your own stocks. don't blank out on me because you hear it all day and you're probably wonld rg what it means.
it's the price to earnings multiple or the p.e. multiple or in total shorthand just the multiple. you will hear the multiple's too cheap, expensive. it's the same thing and it's the way we compare. when you hear talking heads pontificate about a stock that's overvalued or undervalued they are talking about the multiple to earnings and whether it's too high or too low. when you hear someone say pepsi is more expensive than coke, they don't mean coke is cheap because it's trading at $55 and pepsi is pricey at $65. a common mistake people make. no. the share price tells you nothing about a stock's valuation vis-a-vis another stock. to make an apples to apples comparison, true comparisons, you've got to take a step back. when you buy a stock you're paying for a small piece of a company's future earnings screen. to value a stock you have to look at where it is tradinging relative to earnings per share
which you will often see rendered as eps, earnings per share. that's what the multiple allows you to do. here's the algebra. it's not math. it's really algebra. i believe most people in high school can do it. maybe middle school. middle school, we had it. the share price, p, equals the earnings per share, e equals the multiple, m. the multiple tells you how much investors are willing to pay for earning. we don't care coke stock is at $55. we care that it's 15 times earnings per share. we don't care that pepsi is 65. we care that it sells at 14 earnings per share. the main ingredient in the sauce, growth. how much bigger the earnings will be next year than this year. not the previous year.
we don't care about that. we care about the future, not the past. we care about the earnings the year after that and the year after that. the stocks of companies with faster growth get rewarded with higher multiples. why? remember, the multiple's all about what we are willing to pay for earnings. the more rapidly a business grows the bigger the future earnings will be. if a fast grower like chipotle, the mexican fast food place sells for 24 times earnings that doesn't make it more expensive than pepsi at 14 times earnings. why? because chipotle deserves the bigger multiple because it has a higher growth rate. 24% versus 8% for pepsi. remember, we are trying to control growth rate using the multiple analysis. here's where it gets interesting. multiples aren't static. another confusinging thing for people. in different markets people pay more or less for the same amount of earnings. when they pay more we call that multiple expansion.
we pay more and the multiple goes higher. when they pay less it's multiple contraction. two more term that is sound more complicated than they are. if you're going to own stocks you have to understand them. that's what hedge funds are trying to gain when they play a sector rotation. of course, the earnings aren't static either. when you buy stock you're making a bet that the e or the m part of the equation is headed higher. so what goes into the earnings? how do you make sure they are increasing and aren't about to collapse? here's vocabulary. when you hear people talking about a bottom line, profits or net income uh they mean the same thing -- earnings! we call it the bottom line because the number is the bottom figure on a company's income statement. to find out how quickly earnings can grow in the future you have to look for clues when it reports quarterly results. that's why i tell you to listen to the conference calls. if you want to do it yourself you have to do the homework. look at the top line, another
unnecessary piece of wall street gibberish. i'm trying to translate everything. it's interchangeable with revenue, top line, sales. they should just say only go to say sales but they all mean the same thing. you want strong sales growth which tells you there is demand for a company's product. this is the key to the ability of most businesses to sustainably grow earnings long term. makes sense. that's why it's important for younger, smaller companies to have fast-growing revenues. investors will pay up for accelerating revenue growth, arg. that means sales are growing at a higher rate than previous years. with a more mature company it should cut costs and return the profits to shareholders in the form of a dividend or potentially a buyback. although we think dividends are more attractive as they put money in your pocket. the other only helps when you sell a stock.
it's also crucial to consider the gross margin which is in no way disgusting and not the least bit marginal. it tells you what percentage of every dollar of sales becomes profit. it's important to figure out how much money a company can make. to figure the gross margin you have to consider the competition, cost of production, the cost of doing business in general. piz businesses with cut throat competition like grocery stores or airlines, they have terrible margins. while microsoft has margins that are downright obese. how about oil? the margins swing up and down with the price of crowd. you need to know the vocabulary before you can evaluate a stock. when you compare look at the price to earnings multiple, the growth rate, the top line, the bottom line and gross margins. that's how we do it. you can do it, too. stay with cramer. i went to a small high school.
you could call him, you had his phone number. he was just focused on making sure we were gonna be successful. he would never give up on any of us. ♪ ♪ ♪ [ male announcer ] what's the point of an epa estimated 42 miles per gallon if the miles aren't interesting? the lexus ct hybrid. this is the pursuit of perfection. with scottrader streaming quotes, any way you want. fully customize it for your trading process -- from thought to trade, on every screen. and all in real time. which makes it just like having your own trading floor,
right at your fingertips. [ rodger ] at scottrade, seven dollar trades are just the start. try our easy-to-use scottrader streaming quotes. it's another reason more investors are saying... [ all ] i'm with scottrade. it's another reason more investors are saying... this is new york state. we built the first railway, the first trade route to the west, the greatest empires. then, some said, we lost our edge. well today, there's a new new york state. one that's working to attract businesses and create jobs. a place where innovation meets determination... and businesses lead the world. the new new york works for business. find out how it can work for yours at thenewny.com. tonight i'm going into penn & teller mode, demystifying the
overly technical wall street gibberish that you hear all the time but may never actually understand. i'm translating the most overused, underexplained terms in the investing business into language you can comprehend. it reminds me of football, the dime package, the nickel package. you have to know what that stuff is to coach. you have to consider this your wall street to english dictionary to help nav dwat through tough markets. more important than the nickel and dime package and more important, the tough sounding terminology that confuses people, makes them give up. makes people say, it's too hard for me. it isn't. i will explain. the fact is all this investing terminology sounds difficult because pros who speak wall street gibberish fluently want it to sound difficult. they want you terrified.
they want you feeling totally ignorant, at a complete loss when it comes to managing your own money. [ ka-ching ] my mission is the opposite. i'm here to enlighten you, to teach because i know you can do better for yourself than the professionals. many just want your fees and commissions. look, i'm from the business. it's not enough for me to come out and tell you which stocks i like. that's what i used to do when i started. that doesn't work. i need you to understand. you can't own them without understanding them. knowing what you own is a must. it's one of my cardinal rules on the show. if you don't have a grasp of how your holdings make money you don't know what to do when stocks turn against you and they will. you don't know when to hold them or when to fold them, in the immortal worlsd of stock sage kenny rogers. say you're holding and what makes you want to fold. in this case, sell the stock. along with what makes you think
the story is intact and maybe at the lower price you should be buying, notal selling. the profusion of arcane terminology on wall street makes it harder to know what you own. let's continue with another ultra important piece of verbiage that's hardly ever explained to you though it's used constantly. my thinking it's called risk reward. the risk reward analysis define it is short term stock picking that the professionals do. what's it mean? let's break it into component parts. assessing risk is about figuring out the down side. how much you stand to lose in a given stock. how far it can fall in the near term. assessing the reward is about figuring out how the potential upside could be. how many points of gain the stock could give you. many people when they analyze a stock only focus on the potential upuh side. because of this that's a grave mistake. in fact, it's more important to understand the risk side of the
risk reward. the pain from a big loss hurts a lot more than the pleasure from an equivalent sized gain. take it from me. let me translate the pain of my losses to you. how do we figure out the risk and reward? these are determined by two different cohorts of investors. the reward a is defined by how much growth money managers could be willing to pay for a stock -- well, they create the top. the risk, the downside is created by what value minded money managers are willing to pay on the way down. they create the bottom. growth guys, top. value guys, bottom. figure the risk. you need to see where the value guys will buy. to solve for the reward you have to think of where the most bullish of growth guys start their -- [ sell, sell, sell ] >> i boil it down to something quick and dirty. five up, three down. how can you know where growth
money managers will start selling? and where the value guys will start -- [ buy, buy, buy ] to do it you need insight into how they think. i have been both a value guy and -- i have changed my stripes. it requires another piece of wall street lingo called growth at a reasonable price. aka garp. growth at a reasonable price. when we talk about growth at a reasonable price that's not a subjective criteria. it's a method of analyzing stocks that i first read about from peter lynch, the great money manager up at fidelity. it's comparing growth rate to price to earnings multiple. growth rate to p.e. multiple. to figure out the maximum the growth guys would be willing to pay for a stock before they start selling you have to look at the world according to to, yes, garp. here is a quick and dirty rule of thumb.
hardly ever let me down. some exceptions but that's okay. we can figure out when a stock is over or undervalued based on what the growth and value money managers would pay. if the stock to earnings multiple is lower than the growth rate to p.e. the stock is probably considered cheap. any stock selling at a multiple which is twice the size of its growth rate or greater is probably too expensive. when i see that, you call. i see twice the growth rate, i don't think. [ sell, sell, sell ] i miss some winners, but that's okay. if a stock is trading at 20 times earning with a growth rate of 10% i don't think it's going much higher than it is. it's reached my two times growth ceiling. another piece of wall street gibberish to simplify the process. the p.e.g. rach owe. what's that? price to earnings to growth rate or the stock's multiple divided by a stock -- rate.
a p.e.g. of one or less is cheap. two or higher is expensive. a high octane super fast grower like, say, google in its heyday from 2004 to 2007 could sell for 30 times earnings and still be inexpensive, cheap. it had a 30% plus long-term growth rate. that's a p.e.g. rate of just one. right at the cheap end of the spectrum and the growth kept accelerating sending the stock to new high after new high. people said, why did you think it could keep going up? i do p.e.g. rate analysis. where do i come up with the numbers? observation. the value investors attracted to stocks selling at p.e.g. rates of one or less create the floor. you should be able to find a buyer if the multiple is at or below the growth rate. growth investors buying high multiple stocks hardly ever pay more than twice the growth rate.
that's the p.e.g. rate of two. no way that stock goes higher. to stick with google in its mega growth mojo, it would have been a sell if it traded up to 60 times earnings, twice the growth rate. like my methods or anyone else's, this is a rough approximation. it's useful especially with the risk reward, but it's not always right. a lot of times a stock will be cheap because the estimates need to be cut. that's what happened to the banks and brokers before the financial crisis. they looked cheap. or it looks cheap relative to growth rate because the growth rate is slowing like the dell during the collapse from 2000 to 2003. in those case it is stock could trade well below the one times growth floor. the p.e.g. could be sinking. it was known as a value trap.
on the other hand, the best time to buy cyclical stacks is when the multiples look outrageously expensive because earnings estimates are too low and need to be raised to catch up with reality. you need to know these things. i try to make them as clear as possible. bottom line, know what you own. know what others will pay for it. that's more important. you need to understand the risk reward, the potential down side and the potential upside before you purchase anything by figuring out where the value investors create the ceiling and the value cohorts created the floor. if you made a list of countries from around the world... ...with the best math scores.
...the united states would be on that list. in 25th place. let's raise academic standards across the nation. let's get back to the head of the class. let's solve this. trick question. i love everything about this country! including prilosec otc. you know one pill each morning treats your frequent heartburn so you can enjoy all this great land of ours has to offer like demolition derbies. and drive thru weddings. so if you're one of those people who gets heartburn and then treats day after day, block the acid with prilosec otc and don't get heartburn in the first place. [ male announcer ] one pill each morning. 24 hours. zero heartburn.
managing your own money is a lot less daunting than it seems when you have a translator, someone like me who can help you decode the arcane and intentionally obscure terminology that the pros use to talk about stocks all the time. that's why i have been giving you my televised wall street gibberish to english dictionary
so you can understand the essentials without being buffaloed by the talk. so far i have been explaining complicated-sounding pieces of jargon that are essential. unfortunately essential to making money in the market. i say "unfortunately" because it is difficult and not an easy thing to translate and i have been doing it for 30 years. difficulty goes in two directions. just as there are concepts that seem complicated there are those that are more simple than they appear. look at trade versus investment. a lot of people say that's interchangeable. that could not be further from the truth. it's a major reason why people don't make money in the market. trade and investment are distinct in the immortal words of offspring, you've got to keep them separated. isn't this splitting hairs, something not for the folcally challenged like myself? isn't it kazewstri which may get
you looking for a dictionary. if you treat one like the other, turn a trade into an investment well you are breaking one of the most important commandments. it's the first commandment of trading from real money, sane investing in an insane world. in true mr. t fashion i will tell you what happens. my prediction for your portfolio is pain! when you buy a stock as a trade you buy it for a future event you think will send the stock higher. maybe they are going to deliver better than expected numbers. i don't expect that on the show. there is so much confusion and that can cause a stock to get clobbered. that is a catalyst. it could be news about an event you're predicting. if it is a pharma stock or bio tech there are catalysts when the company releases clinical
trial data about important drugs and development. or the fda decides whether or not to approve a given treatment. you can do homework. these are data points to send a stock soaring if they go your way. when you make a trade, going into it you know there is a moment to buy before the catalyst and a moment to sell. that's after the catalyst happens. sometimes your trades won't work. most don't. the events you're waiting for won't happen. or maybe the data point turns out less positive than you expected or the stock does nothing on the news. doesn't matter. either way when you buy a stock as a trade it has a limited shelf life. there is only a brief window where you want to own it. once the window passes, the event happens, the catalyst is done, you must sell, sell, sell. doesn't matter. hopefully you will will right and the catalyst will help you rack up a nice gain. if that happens, no point in sticking around. lock in your profits before they evaporate. if it's wrong you still need to
sell. you can't come up with a new reason and say, that didn't work out. i'll invest now. i'm done with trading. uh-uh. when you buy a bottle of milk, you don't drink it after expiration. you throw it away. this is the same as milk. you can't buy more and call it a longer term investment. without the catalyst you have no reason to own the darn stock. never own anything without a reason. i have watched a parade of people lose money by turning trades into investments. they come up with an ally bye for staying in a stock. the expiration date of a trade. they fool themselves into believing they are doing the right thing and more you have aen than not they get crushed. without a catalyst you don't have a trade. if you find yourself in that position you better sell and cut your losses. an investment, check the cramerican dictionary. investment is different. it's based on a long-term thesis. the idea that a stock can make you serious money over time.
you are not banking on a particular data point, event or specific catalyst. you expect many good things will happen in the company's not too distant future. that's not an excuse to buy a stock and forget it. that's known as buy and hold. investments can go wrong, too. which is why i tell you to do an hour of homework per week per stock if you can. if not, listen to the conference calls, get as much research as you can. when a stock you like goes down in the short term it makes sense to buy more as long as the fundamentals are sound. you don't have to cut your losses. it just got cheaper. the corollary is you don't ring the register after the first time the stock jumps in price. you're looking for larger gains over a long period of time when you invest. this is going to sound like i did something good but it was a mistake. the mistake i made was with apple. my charitable trust bought it at $26 before the iphone was a glimmer in steve jobs's eye.
then i turned around and sold it after a quick five-point gain. i threw investment thesis out the window for a profit. turned out to be tiny given the gains i would have had if i held it longer term. i said, o man, i'll make the five. the investment was meant to make more and i turned it into a trade. not all of the language is complicated. some of it is simple like the distinction between trade and investment. they are not the same thing. it's a big mistake to turn a trade based on a catalyst whether successful or unsuccessful into an investment. don't do it. expiration date. think milk. assad in arizona. >> caller: hey, jim. i think the show is fabulous. i have a question. >> yeah. >> caller: i have a few thousand dollars saved up. i have a teenager going to college in a few years. i'm looking for a long-term investment. what should i look in a company for?
>> well, when we make a long-term investment we are looking at the ability of a company to pay increasing dividends over time. that's why i have recommended procter & gamble or 3m. they have been the best dividend boovsers in the world. that's why i like federal realty. the best booster in the real estate investment trust. that's what we are looking for to save with. dividend plays where we reinvest. don't take the dividends. reinvest. that's how you make money. jim in georgia. >> caller: a big down south b-b-boo-yah. >> a stuttering peach boo-yah for you. >> caller: i'm more of a trader but my entry point often become it is new resistance after a rise and a pull back. it's happened several times. it leads to very small gains. is there a way to use this to my advantage or get in earlier? >> i would say the antidote is it sounds like you're putting all the money to work at one
level. that's a mistake. you have a good idea. you believe in the idea. buy a little bit and hope it comes down so that's your floor. the worst that happens with my philosophy is the stock shoots up big. that's a high quality problem when you have only made a little bit of money instead of losing money. don't buy all at once. space them out, pyramid style. michael in idaho. >> caller: hey, jim. my question is based on your advice that we scale out of our investments as they appreciate. >> exactly right. >> caller: we can't do that indefinitely. how and when do we get the money back in the market and how do we do it without acquiring too many positions? >> these are real portfolio questions. i ought to do a show about this question. i want you to take half off the table by doing it in stages. you have a $20 stock that gets to $30 you should be done with half of it. let the rest run. the ultimate goal, get the
house's money and forget about the note. never forget. take the house's money and then you have the freedom to let it run. that's how we know when we are done selling when what's left is the house's money. even the simplest sounding wall street jargon is misleading. remember cramer's first rule of trading from "real money" now in paperback. keep them separated. never turn a trade into investment and vice versa. you will do better than everybody else. stay with cramer. but you won't need... ♪ hajimemashite. hajimemashite. hajimemashite. you guys like football ? thank you so much. i'm stoked. you stoked ? totally. ... and he says, "under the mattress." souse le matelas. ( laughter ) why's the new guy sending me emails from paris ? paris, france ? verizon's 4g lte devices are global-ready. plus, global data for just $25. only from verizon.
we asked total strangers to watch it for us. thank you so much, i appreciate it, i'll be right back. they didn't take a dime. how much in fees does your bank take to watch your money ? if your bank takes more money than a stranger, you need an ally. ally bank. no nonsense. just people sense. how math and science kind of makes the world work. in high school, i had a physics teacher by the name of mr. davies. he made physics more than theoretical, he made it real for me. we built a guitar, we did things with electronics and mother boards. that's where the interest in engineering came from. so now, as an engineer, i have a career that speaks to that passion. thank you, mr. davies.
welcome back to the wall street gibberish to plain english translation guide edition of "mad money." this is the book in hard back. i prefer the tv version. all night i have been explaining overly arcane and esoteric investing concepts and financial jargon. i'm trying to bust it, help you become a better investor, make the process of managing your money seem less daunting. what else do you need to know? all right. here's one of the most dreaded and poorly understood terms in the business. ready? the correction. what a euphemism. a correction is when after the
market hasbeen roaring it gets crushed. making you feel like the world is ending. you never want to own stock again in your life. that's precisely the wrong reaction. it may feel horrible, but stocks can and do come back from corrections. they bounce back from the big declines all the time, especially coming off a major run. when the market goes on a 56-game hitting streak a la joe dimaggio and then doesn't hit the next day it's what happens when we go too far too fast. i want you to build it in. expect corrections. they can happen to an individual stock, an index, the whole market and bonds and you never see them coming. you can't beat yourself up for not anticipating them.
sell-offs are a natural feature of the stock market landscape. we don't have to like them but they will happen no matter what. don't get so flustered or worse, i never want to see -- because no one made a dime doing it -- panic when they smack you or whip you in the face. finally, i've got one last piece of investing vocabulary that you must master. the idea of execution. this is a tough one. it's subjective, but when we talk about execution we mean management's ability to follow through with plans, ones that are in the conference call, in the board meeting, in the annual report. when you own a stock there are risks associated with execution. messed up mergers, bad cost controls. the number of ways a bad management team can screw up a company is infinite. that's a reason why i like companies with proven management teams. they're much less likely to make these kinds of unforced errors.
it's a big reason why it's so important for you to pay attention when i bring ceos on the show. nobody knows a company better than the people running it. since you probably can't get the ceo on the phone yourself you want to see what they have to say first hand on "mad money." kpe can cushion is crucial when it comes to pag up for best of breed companies. almost always with proven executives. hard to find a best of breed in the first year of an executive's career. i don't like ceos in the first year. too dangerous. best of breed stocks are almost always more expensive than their competitors. some people get fooled. it's worth the price. a good management team is less likely to make mistakes and less likely to be buried by problems. more likely to figure out how to solve them or turn them into opportunities. bottom line. do not be afraid of corrections or intimidated by people who use the word a sharp sell-off after a big rally has to be built in
and expected. don't fear corrections. it's hard to quantify but execution is a crucial factor when it comes to picking stocks. you want companies with proven seasoned management teams that are less likely to drop the ball. "mad money" is back after the break. this is new york state. we built the first railway, the first trade route to the west, the greatest empires. then, some said, we lost our edge. well today, there's a new new york state. one that's working to attract businesses and create jobs.
a place where innovation meets determination... and businesses lead the world. the new new york works for business. find out how it can work for yours at thenewny.com. trick question. i love everything about this country! including prilosec otc. you know one pill each morning treats your frequent heartburn so you can enjoy all this great land of ours has to offer like demolition derbies. and drive thru weddings. so if you're one of those people who gets heartburn and then treats day after day, block the acid with prilosec otc and don't get heartburn in the first place. [ male announcer ] one pill each morning. 24 hours. zero heartburn.
never stop doing your homework. this means spending one hour per week for each stock you own. when the market throws a curve ball uchb to be ready. ♪ ♪ ♪ ♪ [ male announcer ] what's the point of an epa estimated 42 miles per gallon if the miles aren't interesting? the lexus ct hybrid. this is the pursuit of perfecti